ETF Spotlight: High-Yield Bonds

ETF spotlight on SPDR Barclays High Yield Bond (NYSEArca: JNK), part of an ongoing series.

Assets: $11.1 billion.

Objective: The SPDR Barclays High Yield Bond tries to reflect the performance of the Barclays Capital High Yield Very Liquid Index, which follows publicly issued U.S. dollar-denominated high yield corporate bonds with above average liquidity.

Holdings: The fund holds industrial, utility and financial corporate debt with a BB or lower rating and a modified adjusted duration of 4.4 years.

The ETF is up 3.5% over the last month, up 5.0% over the past three months and up 3.6% year-to-date.

The fund is 2.3% above its 200-day exponential moving average.

“With increased leverage comes the increased probability of default and bankruptcy,” according to Timothy Strauts, Morningstar analyst. “In the grand scheme of things, risk equals return, and the high yield of these bonds is designed to compensate investors for this risk.”

“Yields are always best viewed relative to what Treasury bonds are doing, and the resulting difference is known as the credit spread – the additional risk that you are being paid above the risk-free rate,” Strauts added.

“There’s a dearth of available yield in other types of bond sectors, especially high quality bonds,” Miriam Sjoblom, a mutual fund analyst at Morningstar, said in the article. “We think the returns relative to the risk are very attractive. We believe we can generate equity-like returns but be better protected by the capital structure.”

“Within a certain range, the deceleration in corporate earnings is positive, because it makes equities less attractive and high-yield more attractive relatively,” Martin Fridson, global credit strategist at BNP Paribas and former chief high yield strategist at Merrill Lynch, said.

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